Rockwell Automation, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. The filing also reports fourth-quarter results. Rockwell Automation supplies industrial automation products, software, solutions and services through Architecture & Software and Control Products & Solutions.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Sales | $4,857.0 million | $4,332.5 million |
| Gross profit / margin | $1,936.4 million / 39.9% | $1,569.5 million / 36.2% |
| Income from continuing operations | $440.4 million | $217.9 million |
| Net income | $464.3 million | $220.7 million |
| Diluted EPS, continuing operations / net income | $3.05 / $3.22 | $1.53 / $1.55 |
| Cash from operating activities | $494.0 million | $526.4 million |
| Free cash flow (non-GAAP) | $410.7 million | $430.8 million |
| Cash and cash equivalents at year-end | $813.4 million | $643.8 million |
| Long-term debt at year-end | $904.9 million | $904.7 million |
Sales increased 12% year over year, including 10% organic growth and a 2-percentage-point currency benefit. The effective tax rate was 19.1%, versus 20.4%. The company paid $1.22 per share in dividends during FY2010 and raised its quarterly dividend to $0.35 effective with the September 2010 payment.
Fourth quarter: Sales were $1,356.9 million versus $1,074.4 million a year earlier; income from continuing operations was $131.3 million versus $28.9 million, and diluted EPS from continuing operations was $0.91 versus $0.20.
Segments and material changes
- Architecture & Software: Sales rose 23% to $2,115.0 million; operating earnings increased to $475.4 million from $223.0 million, and operating margin improved to 22.5% from 12.9%.
- Control Products & Solutions: Sales rose 5% to $2,742.0 million; operating earnings increased to $241.8 million from $206.7 million, and operating margin improved to 8.8% from 7.9%.
- Product sales grew 22%; solutions and services sales declined 4% for the year, though management said orders improved and those sales returned to year-over-year growth in the second half.
- Sales increased across regions; Asia-Pacific had the strongest organic growth at 17%. Emerging markets represented more than 20% of company sales.
- Margin recovery reflected higher volume, favorable mix and approximately $120 million of savings from prior restructuring. These benefits were partly offset by higher employee compensation, pension and postretirement expense, and growth-related spending.
Cash, debt and liquidity
Operating cash flow declined to $494.0 million from $526.4 million, while free cash flow declined to $410.7 million from $430.8 million. Management attributed the free-cash-flow decrease principally to a discretionary $150 million U.S. pension contribution and higher working capital, including increased receivables and inventory. Capital expenditures were $99.4 million. The company had no commercial paper borrowings outstanding and no drawings under its $567.5 million revolving credit facilities at year-end. Debt-to-total-capital was 38.3%, down from 40.7%.
Working capital increased as demand recovered: receivables rose to $859.0 million from $726.3 million and inventories to $603.3 million from $436.4 million. Current assets were $2,586.6 million and current liabilities $1,222.3 million at September 30, 2010.
Outlook, risks and unusual items
- The filing states long-term financial goals of 6–8% revenue growth, double-digit EPS growth and 60% of revenue outside the United States. It does not provide a clear FY2011 revenue or EPS forecast.
- Management expected FY2011 capital expenditures of about $120 million and pension expense of approximately $90.9 million, up from $75.0 million in FY2010. The U.S. pension discount-rate assumption decreased to 5.60% for FY2011.
- Management described the early industrial recovery as stronger than expected, but cited high unemployment and low capacity utilization as uncertainties about its pace.
- Key risks include cyclical customer capital spending, international and currency exposure, competition and pricing, reliance on distributors and suppliers, execution of solutions projects and the continuing global ERP implementation.
- Defined-benefit plans remained underfunded: pension plans’ funded status was a $693.1 million deficit, and postretirement benefits were a further $209.3 million unfunded. A discretionary pension contribution materially affected FY2010 cash flow.
- Contingencies include asbestos claims and environmental remediation. The company reported a few thousand asbestos claimants and estimated reasonably possible environmental costs that exceed recorded accruals; management did not expect these matters to have a material adverse effect on financial condition.
- The DOJ declined to pursue charges over the disclosed Foreign Corrupt Practices Act matter, but SEC negotiations over possible civil claims remained ongoing. The company also reported a $21.3 million discontinued-operations tax benefit related to resolution of a tax matter from the 2007 divestiture.
Most important facts for investors to verify
- Whether the recovery in product demand and the second-half improvement in solutions and services orders continued after FY2010.
- Whether working capital normalizes and operating cash flow supports planned investment, dividends and repurchases.
- How pension assumptions, funding needs and benefit costs develop, including the expected FY2011 pension expense.
- The ultimate cost and resolution of asbestos, environmental, tax and FCPA-related matters, particularly the pending SEC discussions.
- Progress and control effects from ERP deployments scheduled through FY2011–2014.
The filing reports an unqualified audit opinion and management and auditor conclusions that internal control over financial reporting was effective as of September 30, 2010.